Hospitals will take a financial hit this year as a result of the new federal rule that cuts the Medicare payment rate for most patient stays that span less than two midnights, Moody's predicts.
A gloomy Moody's Investors Service sector comment on the controversial two-midnights rule for inpatient admissions came as little surprise last week to hospital finance executives, but federal officials say the negative impact on healthcare providers is overstated.
The comment, released Wednesday, predicts the "reimbursement difference between inpatient and outpatient cases will decrease profits" at hospitals, with the average revenue reduction per affected case set at $3,000 to $4,000. "Previously, inpatient status was largely determined by medical necessity," Moody's wrote. "We expect the rule change will weaken hospital operating profitability in calendar year 2014 because it will lower Medicare reimbursement for these cases."
Under the rule, which CMS issued in August 2013 but has been delayed until October, hospitals that admit patients for a period of less than two midnights will receive reimbursement at Medicare B outpatient rates. The rule states that hospital admissions shorter than two midnights in length are "generally inappropriate for payment under Medicare Part A, regardless of the hours the patient came to the hospital or whether the patient used a bed."
"The patient is going to stay no more or no less than is medically necessary," Alvin Felgar, president and CEO of Frisbie Hospital in Rochester, NH, said. "The patient is still going to get the same care. We're just going to be paid a whole lot less for it." He was reached at his office Friday.
Moody's also found the two-midnight rule "will accelerate trend of inpatient care shifting to outpatient… pressuring hospital revenues."
In a prepared statement Friday, federal officials said that the investor service report exaggerates the new rule's financial impact on hospitals. "CMS does not agree with the assertion that the two-midnight rule will accelerate the trend of inpatient care shifting to outpatient," the officials said.
"CMS stated the following in the FY 2014 Hospital Inpatient Prospective Payment System (IPPS) Final Rule: 'our actuaries… estimate that there will be approximately $220 million in additional expenditures resulting from the net increase in hospital inpatient encounters [emphasis added] due to some encounters spanning more than 2 midnights moving to the IPPS from the OPPS, and some encounters of less than 2 midnights moving from the IPPS to the OPPS.'"
CMS also pointed to the intent of the two-midnights rule as described in an agency Q&A document, which states the "rule developed, in part, to address concerns regarding benefit eligibility and beneficiary cost-sharing issues associated with prolonged outpatient hospital stays."
'Millions of dollars'
Daniel Steingart, an assistant vice president at Moody's who worked on the analysis of the rule, said in an interview that the financial impact on hospitals will vary from facility to facility, but an overall negative effect is expected on bottom lines. "Right now, we're just starting to see it happen," he said. "It's in the millions of dollars for institutions, for sure."
Two-Midnight Rule Must be Fixed or Replaced, Say Providers
The Moody's sector comment singles out small community hospitals as facing the greatest financial risk from the two-midnight rule because they have a relatively high percentage of short-stay patients and less administrative resources to adapt to the new rule's reporting requirements. "I don't expect this rule to put anybody out of business, but it is yet another challenge," Steingart said, adding many small community hospitals will "absolutely" face credit rating pressure as a result of the new rule.
The administrative costs of implementing the two-midnights rule are mainly linked to documenting patient records to ensure length of stays are properly categorized as outpatient or inpatient.
While the two-midnight standard provides an increased measure of temporal clarity in setting the line between outpatient and inpatient care, a new set of records are required under the new rule because an admitting doctor's medical judgment is a critical factor in determining inpatient admission status. As CMS officials noted Friday, "The rule is based on expected length of stay."
"It's our experience in general that smaller hospitals have fewer administrative resources to deal with this," Steingart said, adding there is insufficient data at this point to quantify the impact of the new rule on administrative costs. "Larger systems tend to have more people who can look at this issue, or any issue."
Felgar agrees and says that Frisbie Hospital, a nonprofit facility with 82 beds and a high proportion of relatively short patient stays, could face decreased profits from the rule. But he said all hospitals will feel the pinch.
"It's going to hit everybody. It's a continuation of the government's efforts to reduce expenditures on healthcare," he said. "I don't see any financial upside at all. It's just another difficulty to overcome."
'Silver Lining'
The rule will have one positive regulatory impact on hospitals and could help cut healthcare delivery costs over the long term, Moody's suggests—fewer Recovery Audit Contractor reviews. "This clarifies it more. There's a strict definition," Steingart said, adding he hesitates to call fewer RAC reviews a significant benefit for healthcare providers. "It's more of a silver lining… It's no great panacea to the hospitals."
Moody's also predicts hospitals will strive to treat patients who are expected to require care for less than two midnights in low-cost settings.
"Over the next two years, we expect hospitals to adapt by adjusting care protocols for the most frequent diagnoses impacted by the rule, and by opening dedicated units to treat these patients," the sector comment states. "Over the last few years, some hospitals have opened lower-cost, separate observation units to care for patients that don't meet the qualifications for inpatient admission but require treatment. This has the potential to lower costs for certain groups of patients."
Steingart said patients reporting chest pains and gastrointestinal symptoms, diagnoses that often land patients on hospital observation status rather than being admitted, could be placed in clinical centers with lower costs than boarding in emergency departments or specialty clinics. But any cost savings hospitals realize from the two-midnights rule will be gained over the long haul, he cautions. "That is not something you can do overnight," he said.
Christopher Cheney is the CMO editor at HealthLeaders.